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Chairman Bernanke delivered a rather pedantic presentation Thursday evening on the Federal Reserve balance sheet.

He discussed the asset side of the balance sheet as well as the liability side and discussed each in relation to the financial debacle which has swirled about us since August 2007. I will refrain from commenting on that but will offer some comments on his discussion of exit strategies.

One of the salient points to make here is that he began his discussion of exit strategies by noting that he and his colleagues believe that accommodative polices will be warranted for an extended period.

Here is the exact quote:

“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period.”

That is unambiguously clear and I do not think it allows any wiggle room for any interpretation other than the one which concludes that the funds rate will approach zero for a very long time.

He then discusses the methods which the FOMC can employ when it does choose to tighten.

He opened the discussion by noting that the Federal Reserve can pay interest on reserve balances and in so doing can establish a floor under the funds rate. He mentioned some of the successes which central banks in Europe have experienced with this tool.

He then moved to a discussion of reverse repo ( which in my day were known as matched sales). It is transaction in which dealers finance the Fed’s portfolio and when the dealers transfer money to the Fed that action drains reserves from the banking system which should cause the finds rate to rise.

It is an ancient tool and has been used quite effectively for years.

The Chairman then moved to a discussion of term deposits for banks. The Federal Reserve, in this instance, could take deposits from members for longer periods of time and pay interest on those deposits. For whatever period of time that the money remains at the Fed in the term facility it is sterile money which can not be lent.

Finally, the Federal Reserve can make outright sales of Treasury, GSE or mortgage securities which it holds in its portfolio.

Once again I think the point to note is that he began the conversation about exit strategy with the comment that it was unlikely to happen any time soon.

There should be, in my opinion, very little market impact from any of this discussion.

Source: Bernanke's Exit Strategy: Not Likely Any Time Soon